Category Archives: Economy

In just over 21 months time, we will hopefully be leaving the EU. With the exception of military matters and the European Arrest Warrant, Mrs May’s objective appears to be for the UK to enjoy a looser relationship with the EU than that of any other European country which is not a member state, apart from countries like Belorus and Russia.

After all, all four EFTA countries (Switzerland, Norway, Iceland and Liechtenstein) are part of the Schengen area while several micro-states including Monaco, San Marino and the Vatican City use the Euro. Turkey is part of the EU’s Customs Union while Norway, Iceland and Liechtenstein are, of course, part of the European Economic Area.

Can we realistically expect to reach a greater degree of detachment than these countries by March 2019? The Government has not gone into any detail about how it proposes to achieve such a radical divorce in a very short space of time, but the Bruges Group published a booklet earlier this year, entitled What will it look like? How leaving the single market can be made to work for Britain. Two of the authors, Robert Oulds and Dr Lee Rotherham, are CIB Committee members.

The problem with staying in the European Economic Area by rejoining EFTA is that it would not resolve the customs clearance issue. We do need a customs agreement with the EU, as a lack of a deal in this area is the biggest problem which our trade with the EU would face. (Just to reiterate, a customs agreement is totally different from remaining in the customs union which, as we have pointed out, is irrelevant as far as Brexit is concerned.)

By contrast, standards compliance rarely causes delays. Another red herring is the issue of access to the EU’s financial services market. It can be accessed from outside the EEA, as the authors explain.

The key to a successful trade deal lies in identifying the potential problems early on, which the authors seek to do in this publication.

With the terms “Hard” and “Soft” Brexit bandied about without everyone being agreed on what this means, the authors claim that there is no such thing as a truly “Hard” Brexit. but there are significant obstacles to be overcome. Nonetheless, a trade agreement between the EU and the UK, focused on tariff reduction and clearing customs, could take just 18 months to complete.

The authors explain why UK’s bargaining position is stronger than many commentators believe. Given that David Davis has already had to concede to his EU counterpart’s demands that talks on a trade deal cannot begin until other exit arrangements have been agreed, any strong cards in his hand will, I am sure, be most appreciated.

This will be one of the first issues to be addressed by the new government once Brexit discussions begin. A number of sources within the EU have said that until a figure is agreed, there can be no discussion on a trade deal. A figure as high as €100 billion has been quoted in some sources. Meanwhile, a number of more ardent Brexiteers have urged that, on the contrary, we should not pay a penny and just leave.

In between these extreme positions, The Institute of Chartered Accountants of England and Wales (ICAEW) has produced a report suggesting that the likely cost should end up somewhere between £5 billion and £30 billion. The most likely figure, £15 billion, would equate to be £225 for every person living in the UK in 2019. This is roughly on a par with our net annual contribution to the EU budget – in other words, how much we pay after the rebate and agricultural subsidies are deducted.

The full report can be downloaded here. Some of the costs have been widely discussed. such as the outstanding contributions to the current EU budget, which covers a seven-year period ending in 2020. Having signed up to the budget in 2014, some argue that we should pay what we agreed, even though for the final 21 months of the term, we will no longer be a member of the EU if the Brexit schedule does not slip.

Any spending which has been authorised but not yet incurred will be hard to avoid. ICAEW’s study puts this figure at £28 billion.

On the other hand, there are assets which we can cash in. We have a 16% stake in the European Investment Bank, estimated to amount to some £10 billion by 2019. With ownership restricted to EU members, our shareholding will need to be sold.

The authors also indicate that some additional expenditure will be needed to complete the Brexit process. After all, for one thing, extra staff will need to be employed for what will be complex but one-off negotiations.

Would we also be expected to foot the bill for the relocation of those EU agencies currently based in London, such as the European Medicines Agency and the European Banking Authority? Time alone will tell as far as this is concerned.

The most contentious part of the deal, claim the report’s authors, is likely to be the level of our commitment to the former Soviet bloc countries which currently are in receipt of massive amounts of development funding.

Of course, the EU was quite open in admitting that infrastructure projects in Spain and Portugal were to be a dry run for the much bigger challenge of putting Central and Eastern European countries on a par with the west. Given the absurd waste of these projects, however, it is hard to have any confidence that money spent in Poland or Romania will be used any more wisely.

This, of course, is one of the many issues which will need to be hammered out when the talks get under way. The ICAEW report has avoided being prescriptive, but on one point it is quite unambiguous – the €100 billion figure is totally unjustified.

By Ambrose Evans-Pritchard. The original first appeared in the Daily Telegraph.

The European Union is hardening its terms on Brexit. There is a new hint of hostility in the language. The tone is peremptory.

Those of us who hoped that Germany would push quietly for an amicable settlement can no longer be so confident. We now learn from Handelsblatt that the German finance ministry insisted on some of the most unfriendly changes to the EU’s latest working documents.

Berlin stipulated that Britain must honour “all obligations” (Verpflichtungen) for divorce payments, a tougher wording than the earlier, gentler talk of legal and budgetary “duties” (Pflichten).

It demanded that Britain desist from tax dumping and financial deregulation that would “jeopardize the stability of the union”. This demand is almost insulting. British regulators have led efforts to recapitalize banks. It is the eurozone and Germany that have dragged their feet on tougher capital rules.

There is no longer any attempt at diplomatic tact. The document states that the European Commission will “determine” when the UK has made “sufficient progress” as it jumps through the hoops, the way it handles accession talks for supplicants hoping to join. It reads like an imperial curia discussing a colony.

The French too have stepped up their demands, insisting that financial services be excluded from the trade deal. The City of London must respect the “regulatory and supervisory standards regime” of the EU in any future arrangement, suggesting that Britain will have to accept the sway of the European Court.

Some argue that France will soften its line under a President Emmanuel Macron. His economic strategist is the anglophile Jean Pisani-Ferry, co-author of a Breugel paper proposing a ‘continental partnership’ between Britain and the EU that preserves very close ties.

Sadly, Mr Pisani-Ferry has made no headway with this idea. I have met Mr Macron enough times – or have seen him at EU venues behind closed doors – to detect a messianic fervour for the European project. He is a crusader by political religion, the EU’s latterday Bernard de Clairvaux.

But it is the hardening mood in Germany that is most ominous. The reason for the sudden change is unquestionably Theresa May’s snap election. While we think that the Prime Minister’s motive is – in part – to build a buffer against Brexit ultras in her own party, that is not the view in Berlin. Germans see her gambit as anti-EU sabre-rattling and a breach of good faith.

“The EU wants to counter Theresa May’s rhetoric and kill the idea that a bigger conservative majority will make any difference to their negotiating position,” said John Springfield from the Centre for European Reform.

The German press has likened Mrs May’s démarche to the defiant posturing of Alexis Tsipras in Greece. They almost take it as a given that her Brexit plan will fail and that she too will be forced to capitulate, grovelling for mercy. One wonders where the briefings are coming from in Berlin.

The parallel with Greece is on one level absurd. Syriza caved after the European Central Bank cut off liquidity and shut down the banking system. Britain is not in the euro or vulnerable to such coercion, and the strategic contours are entirely different.

Yet the Greek saga is instructive. The lesson is that you do not bluff with the EU power structure. If Theresa May still thinks that “no deal is better than a bad deal”, she had better have a credible Plan B, and she must be willing to activate it.

Falling back to the minimalist option of the World Trade Organisation and hoping to craft global trade deals smacks of defeat. It would leave Britain in limbo, pleading with the US, Japan, China, India, and other countries to embark on talks when they have larger matters at hand.

So it is time to think in revolutionary terms. Parliament’s Exiting the EU Committee called earlier this month for a detailed study of what it would mean if the UK left the EU without a deal. Downing Street should answer this legitimate request, and the menu should include the nuclear option of unilateral free trade.

This is a heady Cobdenite manifesto, a turbo-charged version of the Repeal of the Corn Laws in 1846. No developed country has ever attempted such a thing, though New Zealand comes closest, leaving aside the special cases of Hong Kong and Singapore.

All tariffs would be cut to zero. There would be no restrictions on imports besides obvious safeguards, such as policing child labour or environmental abuses, or for national security reasons.

It needs no reciprocation, working from the premise of Adam Smith that if any other country wishes to impose or maintain barriers that is their own folly. They suffer the welfare loss. The currency would adjust to the new equilibrium, keeping the current account close to balance over time.

Adam Smith’s Wealth of Nations laid out the argument that protectionists hurt themselves most

Adam Posen, head of the Peterson Institute in Washington, said Britain would face a rough time with no EU trade deal but at least such a plan has creative allure. “It is far more credible than other options,” he said.

The current dismal narrative on Brexit would be transformed overnight. Britain would suddenly be seen by the rest of the world as pioneering nation at the forefront of globalism, reasserting Thatcherite audacity, rather than a crabby islanders in decline. “People’s jaws would drop,” says Professor Patrick Minford from Cardiff University.

Pure free trade cuts through the Gordian Knot, eliminating the need for an army of technocrat negotiators and for yet more of those supra-national tribunals that so proliferate, eviscerating democracies and sapping consent for globalism.

Prof Minford says the hide-bound political class has yet to give such clear blue sky proposals a serious airing. “It is so unfamiliar. It takes a mental somersault to break free of mercantilist thinking,” he said.

Economists for Brexit – now Economists for Free Trade – certainly got off on the wrong foot last year by suggesting that the UK would be positively richer under such a model. This invited a blizzard of criticism.

My own view has always been that there will be a negative shock from Brexit and withdrawal from the single market, with effects on GDP at best neutral by 2030 with the right policies.

Professor John Van Reenen, a trade expert at MIT and a vocal critic of the Minford plan, says retreat to the WTO would cost roughly 2.5pc of GDP compared to remaining in the EU, with losses rising over time to 8.5pc due to productivity effects.

Open Europe did not win to many friends in the run-up to last June’s referendum vote, its “reformist” position created mistrust among both leavers and remainers, being too supportive of staying in for the former and too EU-critical for the latter.

Following the vote to leave, Open Europe has continued to contributed to the debate, producing analysis now aimed at securing what is, in its opinion, the best possible Brexit deal.

Its latest offering came out earlier this week. Entitled “Nothing to declare: A plan for UK-EU trade outside the Customs Union“, the full paper can be downloaded from the Open Europe Website.

During the referendum campaign, the customs union hardly featured as an issue, unlike the single market. This is unsurprising as the leave campaign emphasized the importance of being able to strike our own trade deals – something which is impossible as a member of the customs union.

Open Europe’s key points are as follows:-

The UK should leave the EU’s Customs Union (EUCU).The UK Government has stated its intention to leave key parts of EUCU (the Common External Tariff and the Common Commercial Policy). Open Europe’s assessment is that leaving these and EUCU overall is correct. Brexit means the UK must be able to shape its own trade policy. It can only do so outside of EUCU.

The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds. The UK should leave EUCU entirely to maximise opportunities. Prime Minister Theresa May has suggested that she is open to being an “associate member” of EUCU or remaining a signatory to elements of it. Open Europe believes that, while it is sensible to keep an open mind, no ‘half-in’ option is better than being fully out. Nonetheless, the UK should consider retaining membership of some relevant conventions.

It is in both the UK’s and EU’s interest quickly to secure full cooperation on the practicalities and administration of customs as part of a comprehensive Free Trade Agreement (FTA). Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs facilitation agreement. The EU already has agreements on customs facilitation with non-members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the continuation of tariff-free UK-EU trade and minimise customs delays.

There will inevitably be a degree of cost to the UK economy associated with leaving EUCU. Some costs will be one-off adaptation costs (e.g. technology investment which may have benefited the UK anyway); other costs will be on-going frictional costs to UK-EU trade. These costs can be minimised and may be offset by trade liberalisation with non-EU partners.

The UK must take action now to minimise costs and seize new opportunities. Some steps are unilateral, domestic reforms; others are bilateral with specific EU members (above all Ireland); other negotiations need to happen at EU level, or indeed more broadly.

There will also be costs to the EU economy and these costs will be much greater if full customs cooperation with the UK is not secured. The costs to the EU economy will be greatest in those countries and industries which export the most to the UK. If comprehensive customs cooperation and an FTA are secured, these costs will be minimised.

There are challenges and opportunities from leaving EUCU but these vary from sector to sector, and even between companies in the same industry. Individual companies will need to look carefully at their supply chains and consider making adjustments where appropriate.

Free trade does not require a customs union and over half of UK trade happens without it. Most UK trade (51.5% in 2015) is not with the EU. Non-EU trade takes place without a customs union and is growing faster than trade with the EU. In 2015, the US was the largest recipient of UK goods exports (16.6%). There is no EU-US FTA, let alone a customs union.

Companies with complex supply chains can trade without a customs union. For example, automotive supply chains cross the US-Canada border. Both countries are North American Free Trade Agreement (NAFTA) members, but are not in a customs union. Nonetheless, leaving EUCU will challenge companies with complex supply chains. To address challenges, the UK and EU need an FTA to eliminate tariffs, to agree liberal cumulation so more products transformed in either the UK or EU can be considered as originating anywhere else in the UK or EU, and to cooperate and use technology to minimise bureaucratic delays and costs.

The UK should ‘grandfather’ – i.e. replicate – the FTAs that the EU has concluded with third countries.The UK, as an EU member, is currently party to over 30 FTAs with over 60 non-EU countries. The Canada-EU FTA, CETA, is one example. Discussions on how to ‘grandfather’ these agreements should be underway bilaterally between the UK and third countries but also need to engage the EU. Protecting these agreements will secure the freest possible trade, safeguarding existing global supply chains, and supporting growth in global trade.

There is an extremely strong economic case for full UK-EU customs cooperation; the question of whether it is achieved or not is primarily political as much as practical. Reaching a comprehensive UK-EU customs agreement will be technically easier than other trade agreements. As an EU member, the UK’s customs systems are already fully recognised by EU members and the UK already applies EU product standards. Businesses across the EU are used to tariff-free trade – so there will be less pressure to defend specific industries.

The UK and EU should consider a transition period to extend the UK’s EUCU membership for one or even two years.Theresa May has suggested “phased implementation” for new arrangements on customs systems. The two-year Article 50 timetable is a challenging limit for negotiations. A transitional period would increase chances of a favourable deal for both sides, and minimise potential disruption to UK and EU business. It would also give governments and business time to adapt, including by upgrading customs procedures and IT. Agreement on a transition period is most useful early in the Brexit negotiations to reduce the risk of companies making rushed decisions on changes.

If you have read the Bruges Group’s latest Brexit paper What will it look like?, you will be aware of the scale of the challenge Mrs May’s team will face in negotiating a seamless exit from the EU within the tight timescale imposed by Article 50 of the Lisbon Treaty. It will be intense – a very hectic time with the potential to go wrong – but the stakes are high on both sides. It’s neither in our interest nor that of the EU to reach Independence Day – possibly the end of March 2019 – without some agreement in place enabling trade to flow smoothly.

It is now over eight months since June’s memorable vote and since then, the UK economy has defied the gloomy predictions. Anyone signed up to the daily news briefs from Global Britain will be well aware of how well the business sector is doing. Only yesterday, for example, the news brief carried reports of Boeing’s decision to establish its first European base in the UK, factories in Plymouth thriving and 500 new jobs being created at the University of St Andrews, including an enterprise centre.

It’s a far cry from the doomsday scenario painted by George Osborne. Thankfully, some remain voters who decided leaving the EU carried too great a risk have graciously admitted that they got it wrong. For instance, Andy Haldane, the chief economist at the Bank of England, said that the worst predictions may turn out to be “just scare stories” and that criticism of economists was a “fair cop” after they failed to predict the financial crisis and were wrong about the impact of the Brexit vote.

True, there has been some negative fallout from the Brexit vote. The fall in the value of sterling, while a bonus for exporters, has caused a rise in inflation, which is not welcome for consumers. This still needs to be put into context, however. At 3%, Spain has annual Consumer Price inflation running at a much higher level than in the UK – indeed, the UK’s current inflation rate, 1.8%, is still below the Bank of England’s target of 2%. For most people in the UK, in spite of the inconvenience of rising prices, the Brexit vote has come and gone and it’s time just to get on with life.

There are the exceptions, however, the most prominent of which are politicians. Following on from Tony Blair’s intervention, Sir John Major’s speech at Chatham House rightly infuriated Mrs May’s ministers. Major did mention that negotiations were going to be a tough, which is a reasonable enough comment to make. However, the tone of his remarks were very different from the Bruges Group’s paper. He called the Brexit vote “an historic mistake” and sought to dampen down the optimism of Government ministers. “The hopes of those who favoured leaving the European Union are sky-high. We are told that countries ”are queuing up to do trade deals with us”. That ”our best days lie ahead”. It all sounds very enticing. And – for the sake of our country – I hope the optimists are proved right. But I’m not sure they will be… If events go badly, their expectations will not be met, and whole communities will be worse off.”

It is one thing to say that some Brexit supporters, including even members of Mrs May’s team, may have underestimated the challenges of the negotiations, but is there almost a wish for Brexit to fail? Are there some people who would positively like to see us slip into a calamitous recession if it means we bottle out and end up stuck in the EU? Take the Guardian’s Polly Toynbee. Last November, she wrote, “Sooner or later, {Philip} Hammond will have to stop pretending the economy is OK.” What was the truth? The economy was doing much better than expected at the time and three months later, the picture hasn’t changed. One comment on the article said “significant inflation is already building up due to this mad plan to leave the EU.” As we mentioned above, the UK inflation rate is well below Spain’s or Belgium’s for that matter, but never mind the facts. It’s as if the unspoken message is “oh good – the more it hurts economically, the more chance there is of people reconsidering their decision.”

But it’s not just columnists and people who haunt the comment sections of on-line newspapers who seem to be willing a recession. In his recent speech Blair admitted that there was “no widespread appetite” for the referendum result to be reversed, but added that he wanted to “build support for finding a way out from the present rush over the cliff’s edge.” Oh wouldn’t it be lovely to have a catastrophe!

Assuming Mrs May manages a successful Brexit, that would be the end of any talk of staying in or rejoining this failing project, which is why, reading between the lines, Blair not only expects but seemingly hopes she will fail. If the secret wish of the hard core remainiacs is that thousands of people should be put out of work, lose their homes and endure poverty because it is the only way so we might be stopped from taking a step forward to freedom and self-determination, all we can say is that these people are merely acting true to form. Perhaps the best comment on Blair’s intervention in tbe Brexit debate came from his former sports minister, Kate Hoey. “Why doesn’t he just now go and find himself a job?”

Why not indeed? It’s time that Blair recognises that his dream of becoming Europe’s Emperor Tony the First died a long time ago. The rest of the EU just wants us gone, Blair and all. There are few in Brussels who want a U-turn now. “This bus has left,” said one senior EU diplomat. “No one is happy about it. But we have moved on and the last thing anyone wants now is to reopen the whole issue.”

In the run up to Christmas I went to quite a few parties and social events. I do not mention this to boast about my social life, but because I ran into quite a few Remainers – some were old acquaintances I had not seen for a while, others were new to me. It was an illuminating experience.

Most of them were friendly – one was not, but then I never liked her very much anyway – and the majority accepted that they had lost. Quite a few had voted Remain only because they had been influenced by the speeches by the great and the good, others because they liked going on holiday to Europe, some because they backed the status quo. They had moved on and accepted that Brexit would happen. A few had voted Remain simply because most of the people they knew were voting Remain.

But the ones I found most interesting to talk to were those who had been vociferous Remainers and still believed that Britain should remain in the EU. And especially entertaining were those who did not know that I had spent the campaign working as Campaigns Manager for Better Off Out.

The conversations often revolved around the fact that Leave voters “believed lies”, or rather less politely “were ignorant” or “stupid”. We’ve all heard these unpleasant slanders, but I took the opportunity to probe further. What seemed to be behind these comments were that the Remainers I was talking to felt that the Leave voters had not understood the question posed in the Referendum.

These folks were keen to talk to me about the “real issues” at stake. Each person had their own take on these, but they tended to be variations on the economic issue. They were concerned with trade with the EU. A few of them actually worked for companies that did business in the EU, but most did not. They seem to have bought the line that you need to be in the EU to trade with the EU. They were worried about the economy or jobs. Despite the lack of any economic downturn since 23 June, they were convinced that disaster would strike soon. They felt that leaving the EU was economic suicide. People who voted to leave had, apparently, not understood the economic issues at stake.

They were keen to tell me that the Brexiteers had not understood the question.

But actually, it was my party-going friends who had not understood. The ballot paper asked us if we wanted Britain to be a member of the European Union. It did not ask us if we want to buy cars from Germany, nor if we wanted to sell pizza to Italy (I jest not, I know one company that does).

Of course, trade with the EU will be affected by the terms of whatever trade deal emerges from talks with the EU. But for me at least such issues were unimportant.

Essentially the question on the ballot paper was a constitutional one. Should the UK be an independent sovereign country or a member state of the European Union?

When a Remainer says that Leavers were “ignorant” or “stupid” or “did not understand”, what they really mean is that the leavers did not agree that economics were of prime concern. They are concerned about the money, the cash, the lucre. Not that they would ever admit to anything so vulgar, of course. They talk about the economy, the jobs, the exports, but their concerns always boil down to money.

And money was not on the ballot paper. Freedom and independence was.

Next time a Remainer tells you that Leavers were “stupid”, you know who is really showing their ignorance.

Rupert Matthews is a freelance writer and historian. During the recent EU Referendum campaign he served as Campaign Manager for Better Off Out and spoke at meetings from Penzance to Aberdeen, Belfast to Dover. Rupert has written over 100 books on history, cryptozoology and related subjects. He has served as a councillor for 8 years and has stood for both the Westminster and European Parliaments. You can follow Rupert on Twitter at @HistoryRupert or on Facebook as rupert.matthews1.